of Two Hundred Fifty Thousand Dollars ($250,000), which you agree to accept in full and final payment and settlement of any and all claims that you have or may have against National; and you shall not, from and after September 18, 1968, hold yourself out as a Consultant or Dealer-Manager with respect to National.

Is that a correct reading of the paragraph?

Mr. LIPTON. It is.

Mr. HARKINS. It further says:

It is understood that National shall have a right in its absolute discretion to determine which of the foregoing arrangements—that is, the contingent Consultant fee or the payment of $250,000-shall be followed by it.

Since Carter, Berlind already had an unconditional contract, why would they agree to this subsequent contract?

(The document referred to appears at p. 318.)

Mr. LIPTON. We had with the SEC pending at that time a proxy statement. It was necessary for us to have a proxy statement processed quickly in order to be able to present our offer in connection with the tender offer being made for shares of Great American Insurance Co., Great American Holding Corp. I had been informed and I heard there was some problems that Carter, Berlind and Weill were havwith the SEC in connection with the Leasco Reliance situation. I then called the representative of Carter, Berlind and Weill and told them of the fact that I had heard about this and that I wanted to make certain that National General Corp. would not in any way be hurt or harmed by virtue of a problem if there was such a problem.

ing

Therefore, I asked them to discuss the matter with me. I pointed out to them that if the proxy statement did not come out promptly, that as far as we were concerned, in my judgment, we would not have an effective tender offer and it would therefore become most important to have the proxy statement issued promptly.

In my judgment, I felt that if there was a problem with Carter, Berlind in the SEC, our proxy statement would be delayed. I informed the Carter people of this situation and I suggested to them that I had the right to go down and discuss the matter with the SEC people and that I would have the right in my judgment, to determine which route to pursue because, if the proxy statement didn't come out and we were unable to consummate the tender offer, the $1 million would not be paid at all because it was a contingent fee. On the other hand, if I decided it would be to the best advantage to National General to take them out of the deal completely, I would then be willing to pay them or the company would be willing to pay them $250,000 upon the registration statement becoming effective. They agreed.

Mr. HARKINS. What was your leverage to get them to agree to come down from this $1 million fee to a $250,000 fee?

Mr. KLEIN. May I interject one moment. The $1 million fee was a conditional fee-if, as, and when we received the majority of shares of Great American Holding. The $250,000 fee was an unconditional fee whether we received the majority shares of stock or not.

So, they knew they had $250,000 in the bank that would be paid regardless, against a possible $1 million.

Mr. HARKINS. On September 26 you exercised your option of paying $250,000 to Carter, Berlind?

(The document referred to appears at p. 319.)

Mr. LIPTON. We paid the $250,000 on September 26, right.

Mr. HARKINS. This was your option and in your absolute discretion? Mr. LIPTON. Correct.

Mr. HARKINS. In your January 24, 1969, prospectus and in most of your filings with the SEC with respect to the new contract you stated, on page 6:

In addition, National has paid Carter, Berlind & Weill, Inc. $250,000 as a consultant-finder's fee for services heretofore rendered to National in preparing studies of the fire and casualty insurance industry in general and Holding Corporation in particular, which studies were relied upon to a major extent in the decision of National to make the Exchange Offer. National has no further continuing relationship with Carter, Berlind, & Weill, Inc. National has purchased approximately 400,000 shares of Holding Corporation Common Stock through Carter, Berlind, & Weill, Inc. and paid brokerage commissions therefor aggregating $175,975.

Is this a correct reading of that paragraph?

(The document referred to appears at p. 320.)

Mr. LIPTON. It is.

Mr. HARKINS. What studies were presented to National General which were relied upon?

Mr. KLEIN. The interim studies.

Mr. HARKINS. Were there any other written documents involved? Mr. KLEIN. As I previously testified they may or may not have supplied others, but if they did they were documents of public record, and I asked my assistant to get all previous proxy material, annual reports and whatever reports were available, and I am sure some of those reports came from Carter, Berlind, but the only other documentation we got from Carter, Berlind were documents that we could have gotten, or were documents of public record.

Mr. HARKINS. Cogan, Berlind by letter dated June 25, 1969, in response to the committee's request for information that they had given to National General, stated,

Enclosed herewith as Exhibit E is a copy of the study prepared by us entitled, "The Financial Services Holding Company" dated August 1967. You should be advised that no particular study was prepared by us for National General Corporation.

Do you have any comment to explain that no particular study was made for National General?

(The document referred to appears at p. 328.)

Mr. KLEIN. I don't know who they prepared the study for or who else they gave the study to. I know that was the study they gave us and the study we relied on.

That gave us a base of information to build our own information which, in effect, gave us the necessary financial knowledge to consummate the transaction.

Mr. HARKINS. Mr. Finell, when you testified before the Senate. Antitrust and Monopoly Subcommittee on March 5, 1969, you had the following exchange with Mr. Cohen.

Mr. COHEN. *** What did they do for that consultant's fee?

Mr. FINELL. As I indicated, we were aware that the insurance companies were grossly undervalued in terms of what we anticipated the development to be. To go out and try to research every insurance company that might or might not be available would be a task we were not at all qualified for. This in essence is the

function they performed for us. They researched all insurance companies and give us a report on the available insurance companies and all the knowledge they had about them.

Is that a correct reading of your statement?

Mr. FINELL. Yes, sir.

Mr. HARKINS. Is the report you are referring to the Netter report ? Mr. FINELL. That is the only report I saw. I have no idea if it was prepared for National General or it had wider distribution. I know now it had much wider distribution.

Mr. HARKINS. Mr. Cohen and you continued your exchange and Mr. Cohen stated as follows:

Mr. COHEN. You also paid them-they also gave you 400,000 shares of stock in the holding company and as I understand it, there is some dispute about how many days but they really gave them to you on credit originally, but they gave you for nothing for a short period of time at least 400,000 shares of the holding company which you were in a fight to get, AMK, for which you paid them brokerage commissions of $157,000.

"Mr. FINELL. Correct, sir."

Is that a correct reading of your statement?

Mr. FINELL. That is correct, sir.

Mr. HARKINS. Is that your testimony?

Mr. FINELL. That is what I said. The details of the financial transaction I had no knowledge of. I did know they had been paid a regular brokerage commission for the 400,000 shares of stock. I had no idea of the specifics of the transaction.

Mr. HARKINS. Would you say they did not give National General credit?

Mr. FINELL. Yes; I would so state based on what I have knowledge of now. I had no knowledge at the time I said, I was answering the last part of the question with regard to $157,000 as brokerage fees. Mr. HARKINS. In other words, you are correcting the statement you gave to the Senate?

Mr. FINELL. No, sir; I didn't intend in front of the Senate to say anything different.

Mr. HARKINS. You did say that you agreed they gave them to you on credit originally?

Mr. FINELL. He asked whether they were paid brokers commissions of $157,000 in connection with 400,000 shares and I answered "yes."

Mr. HARKINS. The testimony states: "... (T)hey gave you for nothing for a short period of time at least 400,000 shares. . . ." and you answered "Correct, sir."

Mr. KLEIN. He is not qualified to know.

Mr. FINELL. I didn't know that and didn't intend to answer that question at the time, if that was the question. I did know they were on a broker's commission on the 400,000 shares.

Mr. HARKINS. At this time, in the interest of time, Mr. Klein, I am going to depart from the chronological order of questioning a little bit and go to the matter of your $173 million stock dividend. I believe you have already testified that you were aware that there was surplus surplus in Great American prior to the first authorization by your executive committee to purchase the shares?

Mr. KLEIN. I so testified.

Mr. HARKINS. When did you first become aware that Great Ameri

can's former management had considered distribution of some of its reserves to the holding corporation?

Mr. KLEIN. When I first became aware of it?

Mr. HARKINS. Yes.

Mr. KLEIN. After we became majority owners of Great American. Mr. HARKINS. On February 11, 1969, National General responded to a request from the SEC for an explanation of how Great American's $173 million dividend could be reconciled with National General's statement that there would be no great change in Great American's method of business operation.

On page 6 of a letter dated February 11, 1969, you recite that under the November 14, 1968, agreement which you had made with the management of the Great American Holding Co. after you had been successful in your takeover, you held discussions on the operations of Great American Holding Co.

Then you state:

Thereafter, additional and nearly continuous meetings were held with the management of Holding Corporation and Great American, during which it was learned that the managements of such companies had given serious consideration to the payment of a substantial dividend from Great American to Holding Corporation, as a more effective means of efficiently utilizing the excessive surplus of Great American for the purpose of Holding Corporation. This and related problems are the subject of various documents, some of which are internal in nature, and some of which represent communications between the companies and their counsel. The following is a summary of a few of such documents, and, if your purposes are such that copies of the documents would appear useful, we will consult with our client concerning the propriety of forwarding such copies.

Is it your position that until these discussions in November, you were not aware that the management of Great American Holding Co. has considered the declaration of dividends from their reserves? Mr. KLEIN. That is correct.

Mr. HARKINS. Your letter summarizes certain documents submitted for the record. These documents have now been submitted by you to the committee. The first document that was delivered to the committee on January 16, 1970, is-do you have copies of the letter?

Mr. KLEIN. Yes.

Mr. HARKINS. This is a document dated January 26, 1968, initialed by "AC" and is document number 1, referred to in the letter. Mr. LIPTON. I am looking for the initial.

Mr. HARKINS. It is on the last page.

Mr. LIPTON. I see it. There is a document.

Mr. HARKINS. Can you identify whose initials they are?

Mr. LIPTON. I believe the initials are for the name of Allen Comrie. Mr. HARKINS. Who is he?

Mr. LIPTON. Executive vice president of Great American Insurance Co., senior vice president, sorry.

Mr. HARKINS. This document states in the first paragraph:

Two alternatives are under consideration to place Insurance Company surplus funds in the Holding Corporation. The first method is a cash dividend payable by the Insurance Company to its stockholders (i.e., Holding Corporation 97% owner). The second method is for the Insurance Company to repurchase and retire its shares from the Holding Corporation and make payment to Holding Corporation in marketable securities presently owned by the Insurance Company.

The proposals were under consideration by Great American management prior to your takeover, is that right?

Mr. KLEIN. I assume so.

Mr. HARKINS. Did this proposal contemplate a cash dividend of $103 million?

Mr. KLEIN. I don't know what the proposal contemplates, yes, plan 1. It is part of one plan they have.

Mr. HARKINS. Another document, and this would be number 5 in the letter, is dated May 20, 1968. It is a memorandum prepared and signed by Shearman & Sterling. Shearman & Sterling was a law firm for Great American Holding Co. prior to takeover, is that right? Mr. LIPTON. That is correct, sir.

Mr. HARKINS. This memorandum states on page 4:

(a) No approval by the Insurance Department will be required either for the dividend in securities or the repurchase by HC of its outstanding stock. This is likely to be changed in the next session of the New York legislature since it is expected that Insurance Department approval will be required for all dividends by subsidiaries of Insurance Holding Companies. Accordingly, it may become advisable to have GAI pay a number of dividends in securities so as to remove its "surplus surplus" (estimated in the area of $150-$175 million) from the control of the Insurance Department

(b) Because of the language of the applicable sections of the Insurance Law, it is believed that it would be inadvisable to declare a dividend in excess of the amount which would be permissible as a cash dividend, i.e., GAI's "earned surplus" available for dividends as determined under § 313 of the Insurance Law. However, since such earned surplus does not include unrealized appreciation, it will only be reduced by the aggregate of GAI's cost for the dividended securities and not by the current market value thereof. It will, therefore, be possible to repeat the process several times. For example, if it is assumed that GAI's earned surplus is presently $45,000,000 and a dividend is declared in securities having a current market value of $45,000,000 but a cost to GAI of only $15,000,000, GAI's earned surplus after the dividend has been paid will be $30,000,000.

Is that a correct reading of the two paragraphs?

Mr. LIPTON. You read it very correctly, Mr. Harkins. Just to make certain we understand this is a document purporting to be prepared by Sterling & Shearman for Great American Insurance Co. and submitted by them to Great American Insurance Co.

Mr. HARKINS. Yes, sir. National General-did they consider these alternatives?

Mr. KLEIN. What was the question?

Mr. HARKINS. Did National General consider the alternatives I just read you?

Mr. KLEIN. Yes.

Mr. HARKINS. Was the possibility of a change in New York insurance law a factor in declaring the dividend on January 14, 1969?

Mr. KLEIN. I think anything is a possibility. There is a possibility of anything; it is conjecture. The dividend was declared on January 14, 1969, on the recommendations of prior management of Great American Holding Co. They had told us they had been prepared or were preparing or would have declared the dividend in any event, or in the event that they had stayed their own entity, they would have declared a dividend, and in the event AMK had been a successful suitor for Great American Holding Co., they would have paid the dividend or they would recommend to National General that the dividend be declared.

We asked management: What was a safe dividend to declare? What was the amount? They came up with a recommendation and figure,